Millegan Creek Apartments Harvard Case Solution & Analysis

Millegan Creek Apartments Case Study Solution

Recommendations

After the deep analysis of the overall competition and real estate market in Austin, as well the analysis of JPI’s ability to fulfill its debt obligations under various scenarios, the bank is recommended to provide loan to JPI for its apartment project. The project is expected to be quite successful on the basis of location, pricing and products offered. Along with it, the company is capable of generating positive cash flows except in one sensitivity scenario. Austin is also a great opportunity for real estate business due to increase in employment rate and population growth. On the basis of these factors the bank is recommended to grant loan to JPI.

However,the bank should set terms and conditions of the project which benefit the bank and the company both and reduces the default risk. It should set an average interest rate of 8%, as the company would be quite profitable even at the higher interest rates. It should set an average interest coverage ratio in between 1.25 and 1.1.

Conclusion

Indeed, the project would be a great success for the Bank as it is a large fiancé opportunity for the Bank on the basis of the increasing Austin employment and population growth, the viability of the location and the presence of giant companies across the area. Along with it, the ability of the company to pay its debt service under various scenarios except declining rental income shows the feasibility of the project. Therefore on the basis of above analysis the bank is recommended to finance the loan to JPI.

 

Exhibits

Exhibit A: Sensitivity Analysis

Proforma Cash Flow Statement (Senstivity Analysis)
Normal Sensitivity Analysis
Decrease in Rent Income Increase in Operating Expenses
Rental Income (336,094 sf @ $ .83/psf per month)a 3,344,697 2862109 3344697
Other income
Garages (160 @ $75/month) 144,000 144,000 144,000
Carports (98 @ $20/month) 23,520 23,520 23,520
Other ($9/unit/month) 42,336 42,336 42,336
Total potential gross revenue $3,554,553 2862109 $3,554,553
General vacancy (7%) $ (248,819) $ (248,819) $ (248,819)
Effective gross revenue $3,305,734 2613290 3305734
Operating expenses
Administrative $ 26,888 $ 26,888 29577
Repairs/maintenance 134,438 134,438 147882
Marketing 40,331 40,331 44364
Salaries 255,431 255,431 280974
Utilities 107,550 107,550 118305
Taxes 477,253 477,253 524978
Insurance 33,609 33,609 36970
Management 134,438 134,438 147882
Total operating expenses $1,209,938 $1,209,938 1330932
Cash flow from operations $2,095,796 1403352 1974802
Leasing & capital costs
Structural reserve $ 33,609 $ 33,609 $ 33,609
Replacement reserve 78,000 78,000 78,000
Total expenses $1,321,547 1321547 1442540.8
Cash flow before debt service $1,984,187 1291743 1863193
Debt Service $1,440,852 1440852 1440852
Cash Flow After Debt Service $543,335 ($149,109) $422,341

Exhibit B: Sensitivity Analysis Scenarios

Scenario 1:  
Decrease in Rental Income
Decrease in sf 10%
Decrease in Rent Per month 5%
Scenario 2:
Increase in Total Operating Expenses 10%

Exhibit C: Increase in Interest Rate

Proforma Cash Flow Statement (Increase in Interest Rates)
Interest Rates
Agreed Senstivity Analysis
7.75% 8% 9%
Rental Income (336,094 sf @ $ .83/psf per month)a $3,344,697 $3,344,697 $3,344,697
Other income
Garages (160 @ $75/month) 144,000 144,000 144,000
Carports (98 @ $20/month) 23,520 23,520 23,520
Other ($9/unit/month) 42,336 42,336 42,336
Total potential gross revenue $3,554,553 $3,554,553 $3,554,553
General vacancy (7%) $ (248,819) $ (248,819) $ (248,819)
Effective gross revenue $3,305,734 $3,305,734 $3,305,734
Operating expenses
Administrative $ 26,888 $ 26,888 $ 26,888
Repairs/maintenance 134,438 134,438 134,438
Marketing 40,331 40,331 40,331
Salaries 255,431 255,431 255,431
Utilities 107,550 107,550 107,550
Taxes 477,253 477,253 477,253
Insurance 33,609 33,609 33,609
Management 134,438 134,438 134,438
Total operating expenses $1,209,938 $1,209,938 $1,209,938
Cash flow from operations $2,095,796 $2,095,796 $2,095,796
Leasing & capital costs
Structural reserve $ 33,609 $ 33,609 $ 33,609
Replacement reserve 78,000 78,000 78,000
Total expenses $1,321,547 $1,321,547 $1,321,547
Cash flow before debt service $1,984,187 $1,984,187 $1,984,187
Debt Service $1,440,852 $1,455,491 $1,582,557
Cash Flow After Debt Service $543,335 $528,696 $401,630

Exhibit D: JPI 10% Cap Rate

JPI 10% Cap Rate

Total Cost of the Development (Exhibit 7) $19,644,000
NI After Interest $1,882,694
Cap Rate 9.58%
NI at 10% 1,964,400.00
Difference between Actual and Required 81,706
Increase % 4.34%

 

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